is an Americanhedge fundfirm based inEast Setauket, New York,onLong Island, which specializes insystematic tradingusingquantitative modelsderived from mathematical andstatistical analyses. The company was founded in 1982 byJames Simons, an award-winningmathematicianand formerCold Warcode breaker.
In 1988, the firm established its most profitableportfolio, the Medallion Fund, which used an improved and expanded form ofLeonard Baummathematical models, improved by algebraistJames Ax, to explore correlations from which they could profit. Simons and Ax started a hedge fund and named it Medallion in honor of the math awards that they had won.67
Renaissances flagship Medallion fund, which is run mostly for fund employees,8is famed for one of the best records in investing history, returning more than 35 percent annualized over a 20-year span.5From 1994 through mid-2014 it averaged a 71.8% annual return.9Renaissance offers two portfolios to outside investorsRenaissance Institutional Equities Fund (RIEF) and Renaissance Institutional Diversified Alpha (RIDA).10
Simons ran Renaissance until his retirement in late 2009.11The company is now run by Peter Brown (afterRobert Mercerresigned), both of them werecomputer scientistsspecializing incomputational linguisticswho joined Renaissance in 1993 fromIBM Research.11012Simons continues to play a role at the firm as non-executive chairman and remains invested in its funds, particularly the secretive and consistently profitableblack-boxstrategy known as Medallion.13Because of the success of Renaissance in general and Medallion in particular, Simons has been described as the best money manager on earth.141516By October 2015, Renaissance had roughly $65billion worth of assets under management, most of which belong to employees of the firm.17
James Simonsfounded Renaissance Technologies following a decade as the Chair of the Department of Mathematics atStony Brook University. Simons is a 1976 recipient of theOswald Veblen Prizeof the American Mathematical Society, which is geometrys highest honor.18He is known in the scientific community for his work,ChernSimons theory, which is fundamental in modern theoretical physics, including advanced theories of how invisible fields like those of gravity interact with matter to produce everything from superstrings to black holes.19
The firm usesquantitative trading, where staff tap data in itspetabyte-scaledata warehouseto assess statistical probabilities for the direction ofsecuritiesprices in any given market. Staff attribute the breadth of data on events peripheral to financial and economic phenomena that Renaissance takes into account, and the firms ability to manipulate amounts of data by deploying scalable technological architectures for computation and execution.20In many ways, Renaissance Technologies, along with a few other firms, has been synthesizing terabytes of data daily and extracting information signals from petabytes of data for almost two decades now, well beforebig dataanddata analyticscaught the imagination of mainstream technology.21
For more than twenty years, the firms Renaissance Technologieshedge fund, which trades in markets around the world, has employed complex mathematical models to analyze and execute trades, many of them automated. The firm uses computer-based models to predict price changes in easily traded financial instruments. These models are based on analyzing as much data as can be gathered, then looking for non-random movements to make predictions. Some also attribute the firms performance to employingfinancial signal processingtechniques such as pattern recognition. The bookThe Quantsdescribes the hiring of speech recognition experts, many from IBM, including the current leaders of the firm.
Renaissance employs specialists with non-financial backgrounds, includingmathematiciansphysicistssignal processingexperts andstatisticians. The firms latest fund is the Renaissance Institutional Equities Fund (RIEF).22RIEF has historically trailed the firms better-known Medallion fund, a separate fund that contains only the personal money of the firms executives.23
In a 2013 article inThe Daily Telegraph, journalist Sarfraz Manzoor described Renaissance staff as math geniuses runningWall Street.16
Of his 200 employees, ensconced in a fortress-like building in unfashionable Long Island, New York, a third have PhDs, not in finance, but in fields like physics, mathematics and statistics. Renaissance has been called the best physics and mathematics department in the world and, according to Weatherall, avoids hiring anyone with even the slightest whiff of Wall Street bona fides.
Renaissance is a firm run by and for scientists, employing preferably those with non-financial backgrounds for quantitative finance research like mathematicians, statisticians, pure and experimental physicists, astronomers, and computer scientists.Wall Streetexperience is frowned on and a flair for science is prized.19It is a widely held belief within Renaissance that the herdlike mentality among business school graduates is to blame for poor investor returns.6Renaissance engages roughly 150 researchers and computer programmers, half of whom have PhDs in scientific disciplines, at its 50-acreEast Setauketcampus inLong Island, New York, which is near theState University of New York at Stony Brook.24MathematicianIsadore Singerreferred to Renaissances East Setauket office as the best physics and mathematics department in the world.25
The firms administrative and back-office functions are handled from itsManhattanoffice inNew York City. The firm is secretive about the workings of its business and very little is known about them.26The firm is known for its ability to recruit and retain scientific types, for having a personnel turnover that is nearly non-existent,27and for requiring its researchers to agree tointellectual propertyobligations by signing non-compete and non-disclosure agreements.28
In 1978 Simons left academia and started a hedge fund management firm called Monemetrics in a Long Island strip mall. The firm primarily traded currencies at the start. It did not occur to Simons at first to apply mathematics to his business, but he gradually realized that it should be possible to make mathematical models of the data he was collecting.
Monemetrics name was changed to Renaissance Technologies in 1982. Simons started recruiting some of the mathematicians and data-modeling types from his days at the Institute for Defense Analyses (IDA) and Stony Brook University. His first recruit wasLeonard Baum, acryptanalystfrom IDA who was also the co-author of theBaumWelch algorithm. When Baum abandoned the idea of trading with mathematical models and took to fundamental trading, Simons brought in algebraistJames Axfrom Cornell University. Ax expanded Baums models for trading currencies to cover any commodity future and subsequently Simons set up Ax with his own trading account, Axcom Ltd., which eventually gave birth to the profitable fund Medallion. During the 1980s, Ax and his researchers improved on Baums models and used them to explore correlations from which they could profit.
From 2001 through 2013, the funds worst year was a 21 percent gain, after subtracting fees. Medallion reaped a 98.2 percent gain in 2008, the year the Standard & Poors 500 Index lost 38.5 percent.
In 1988 Renaissance established its most famous and profitable portfolio, the Medallion fund, which used an improved and expanded form ofLeonard Baummathematical modelsimproved by pioneering algebraist James Ax to explore correlations from which they could profit. Simons and Ax started a hedge fund and named it Medallion in honor of the math awards that they had won.67The mathematical models the company developed worked better and better each year, and by 1988, Simons had decided to base the companys trades entirely on the models.67
By April 1989, peak-to-trough losses had mounted to about 30%. Ax had accounted for such a drawdown in his models and pushed to keep trading. Simons wanted to stop to research what was going on. After a brief standoff, Simons pulled rank and Ax left. Simons turned toElwyn Berlekampto run Medallion fromBerkeley, California. A consultant for Axcom whom Simons had first met at the IDA, Berlekamp had bought out most of Axs stake in Axcom and became its CEO. He worked with Sandor Straus, Jim Simons and another consultant, Henry Laufer, to overhaul Medallions trading system during a six-month stretch. In 1990, Berlekamp led Medallion to a 55.9% gain, net of fees and then returned to teaching math atUniversity of California, Berkeleyafter selling out to Jim Simons at six times the price for which he had bought his Axcom interests 16 months earlier. Straus took the reins of Medallions revamped trading system and Medallion returned 39.4% in 1991, 34% in 1992 and 39.1% in 1993, according to Medallion annual reports.629
The Medallion fund is considered to be one of the most successful hedge funds ever. It has averaged a 71.8% annual return, before fees, from 1994 through mid-2014.9The fund has been closed to outside investors since 199330and is available only to current and past employees and their families. The firm bought out the last investor in the Medallion fund in 2005 and the investor community has not seen its returns since then.8About 100 of Renaissances 275 or so employees are what it calls qualified purchasers, meaning they generally have at least $5million in assets to invest. The remaining are accredited investors, generally worth at least $1million.9
Since its inception in March 1988, Simons flagship $3.3billion Medallion fund, has amassed annual returns of 35.6 percent, compared with 17.9 percent for the Standard & Poors 500 index. For the 11 full years ended December 1999, Medallions cumulative returns are an eye-popping 2,478.6 percent. Among all offshore funds over that same period, according to the database run by veteran hedge fund observer Antoine Bernheim, the next-best performer was Soros Quantum Fund, with a 1,710.1 percent return (see table, page 44). Simons is No. 1, says Bernheim. Ahead of George Soros. Ahead of Mark Kingdon. Ahead of Bruce Kovner. Ahead of Monroe Trout.
By the year 2000, the computer-driven Medallion fund had made an average of 34% a year after fees since 1988.14Simons ran Renaissance until his retirement in late 2009.11Between January 1993 and April 2005, Medallion only had 17 monthly losses and out of 49 quarters in the same time period, Medallion only posted three quarterly losses. Between 1989-2005 Medallion had only one year showing a loss: 1989.31
[Renaissance] won the [Labor Department]s permission to put pieces of Medallion inside Roth IRAs. That means no taxes ever on the future earnings of a fund that averaged a 71.8 percent annual return, before fees, from 1994 through mid-2014.
Renaissance Technologies terminated its401(k)retirement plan in 2010 and employees account balances were put intoIndividual Retirement Accounts.9Contributions could be made to a standard Individual Retirement Accounts and then converted to aRoth IRAregardless of income.32By 2012 Renaissance was granted a special exemption by the United StatesLabor Departmentallowing employees to invest their retirement money in Medallion arguing that Medallion had consistently outperformed their old 401(k) plan. In 2013 Renaissances IRA plans had 259 participants whose $86.6million contribution grew to $153million that year without fees or annual taxes.9Renaissance set up a new 401(k) plan and in November 2014 the Labor Department allowed that plan to be invested in Medallion as well.9
In 2005 Renaissance Institutional Equities Fund (RIEF) was created.22RIEF has historically trailed the firms better-known Medallion fund, a separate fund that only contains the personal money of the firms executives.23Renaissance also offers two Renaissance Institutional Diversified Alpha (RIDA) to outsiders.10Simons ran Renaissance until his retirement in late 2009.11Renaissance Institutional Equities Fund had difficulty with the higher volatility environment that persisted throughout the end of the summer of 2007. According to an article inBloombergin August 2007,33
James Simonss $29billion Renaissance Institutional Equities Fund fell 8.7% in August 2007 when his computer models used to buy and sell stocks were overwhelmed by securities price swings. The two-year-old quantitative, or quant, hedge fund now has declined 7.4 percent for the year. Simons said other hedge funds have been forced to sell positions, short-circuiting statistical models based on the relationships among securities.
On 25 September 2008, Renaissance wrote a comment letter to theSecurities and Exchange Commission, discouraging them from implementing a rule change that would have permitted the public to access information regarding institutional investorsshortpositions, as they can currently do withlongpositions. The company cited a number of reasons for this, including the fact that institutional investors may alter their trading activity to avoid public disclosure.34
In July 2014 Renaissance Technologies was included in a larger investigation undertaken byCarl Levinand thePermanent Subcommittee on Investigationson tax evasion by wealthy individuals.5The focus of the tax avoidance investigation was Renaissances trading strategy which involved transactions with banks such asBarclaysPlc andDeutsche BankAG through which profits converted from rapid trading were converted into lower-taxed, long-term capital gains.5The strategy was also questioned by theInternal Revenue Service(IRS).5The higher rates for the five years under investigation would have been 44.4 percent, as compared to 35 percent, whereas the lower rate was 15 percent, as compared to 23.8 percent.5
The IRS contend[ed] that the arrangement Renaissances Medallion fund had with the banks, in which the fund owned option contracts rather than the underlying financial instruments, is a ruse and that the fund investors owe taxes at the higher rate. Because Medallion could claim that it owned just one asset the option and held it for more than a year, investors could declare their gains to be long-term investments.
According to theCenter for Responsive Politics, Renaissance is the top financial firm contributing to federal campaigns in the 2016 election cycle, donating $33,108,000 by July.35By comparison, over that same period sixth rankedSoros Fund Managementhas contributed $13,238,551.35Renaissances managers have also been active in the 2016 cycle, contributing nearly $30 million by June, with Mercer ranking as the 1 individual federal donor, largely to Republicans, and Simons ranked 5, largely to Democrats.36They were top donors to the presidential campaigns of Hillary Clinton37and Donald Trump.38
During the 2016 campaign cycle Simons contributed $26,277,450, ranking as the 5th largest individual contributor. Simons directed all but $25,000 of his funds towards liberal candidates.Robert Mercercontributed $25,059,300, ranking as the 7th largest individual contributor.Robert Mercerdirected all funds contributed towards conservative candidates.
Since 1990 Renaissance has contributed $59,081,152 to federal campaigns and since 2001 has spent $3,730,000 on lobbying.39
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Mathematics, Common Sense, and Good Luck: My Life and Careers.
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Interest Groups: Finance/ Insurance/ Real Estate.
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